More Gulf War Veterans have died than Vietnam Veterans. This probably is news to you. But the truth has been hidden by a technicality. So here is the truth.

The casualties in the Vietnam War were pretty simple to understand. If a soldier was dead from his combat tour, he was a war casualty. There are 58,195 names recorded on the Vietnam War Memorial in Washington, DC.

Some of these brave men died in the jungles of Vietnam while others died in Medivac units or hospitals in Japan and America. A dead soldier can surrender his life anywhere in his service to his country. It really doesn't matter where this happens. The location of a soldier's death in now way colors his sacrifice to his country.

But something odd has happened with the Iraq War. The government, under the Bush administration, did something dishonest that resulted in a lie that's persisted since the war began -- and continues to this very day. They decided to report the war deaths in Iraq only if the soldier died with his boots on the ground in a combat situation.

What's the difference, you might ask?

The combat in Vietnam was in rural areas, far removed from medical treatment centers. Injured soldiers were treated by a Medic. Most died at the scene of the battle before they could be evacuated. Many died on route or were declared dead at the medical treatment facilities. The situation in Iraq is vastly different.

Fighting in Iraq is mainly in urban areas. Soldiers who are injured are quickly evacuated with armored personnel carriers or helicopters. It's a much more efficient system than what was possible in Vietnam, but for those that are seriously injured it means that death is more likely to happen while they are in transit or at the treatment facility.

Under the new reporting system, deaths that happen en route or post evacuation are not counted as combat deaths. This is why the number seems unusually low -- a little over four thousand as of 2009.

The actual figures have been hidden from the American public just like the returning, flag draped coffins were censored from the press. But the figures are now available and we can only hope that the American people will be outraged when they learn how they have been misled.

According to The Department of Veterans Affairs, as of May 2007, reports in the Gulf War Veterans Information System reveal these startling numbers:

More than 1,820 tons of radioactive nuclear waste (i.e. depleted uranium) were exploded in Iraq alone in the form of armor piercing rounds and bunker busters. This represents the worlds worst man made ecological disaster ever. 64 kg of uranium were used in the Hiroshima bomb. The U.S. Iraq Nuclear Holocaust represents far more than fourteen thousand Hiroshima's.

The nuclear waste the U.S. has exploded in the Middle East will continue killing for hundreds of years! That's how long these particles of radioactive dust will continue to blow around, get lodged in someone's lungs or be ingested. Scientists calculate that there is now enough radioactive material in Iraq to wipe out a third of the world's current population.

While we never found any WMD's (Weapons of Mass Destruction) in Iraq, we sure made up for it by importing our own! Birth defects among Iraqi newborns are up a whopping 600% from before the war. The defects are typical of the kind produced by exposure to radioactive poisons. And these injuries are happening to the civilian population of Iraq -- the people we were supposedly "liberating."

This writer happened to visit Iraq back in 2001, at the time Saddam Hussein was still in power. The world's nations were imposing an embargo on all imports in an attempt to punish the nation for invading the neighboring nation of Kuwait. I remember the good people of Iraq who treated me with kindness and hospitality -- even while knowing I was an American. Despite the embargo on such vital things as medicine and hospital supplies, the markets were thriving with local produce. Children freely played in the streets and there was laughter. To see what this war has done to Iraq is especially painful and speaks loudly of the immorality that has caused these innocent people to suffer. And now, to see that this same immorality extends to the American people in the form of deception and lies crosses the line.

I live in a small town in New England. We have known of many casualties from Iraq -- too many. Yet the numbers being reported in the media make it seem that this is a rare occurrence. Just over 4,000? How can this be? In short -- it's NOT.

What will it take to awaken people and make them angry enough to hold our government responsible for these lies? A democracy is only good if its people are well informed. How else can we make decisions abou what's best for us? If we are fed s*** and kept in the dark we truly are a nation of mushrooms.

Before I end this I want to say a big THANK YOU to all the vets who put their country and its people before themselves. We are proud of you and believe that you put your lives on the line for something a little better than what we are currently experiencing with our government. Thanks to you we're still a democracy. So it's up to us, the people you fought for, to make your effort worthwhile.

Friday, January 29, 2010

AAPL has turned south clearly and as I said earlier big fan and the tablet is cool but not a blockbuster for now. The Techs are generally in trouble as they had a great year with Jupiter in Aquarius but that is over now and things will be back to the blunt reality and things are ugly out there. Expect a drop to 150 at least over the next 3-4 months and sell short any strength towards 200.

Six months ago, with what I mistakenly took to be your tacit approval, I attempted to address ordinary Americans, almost as equals. They envied and resented our firm; I sought merely to correct their misunderstandings about Goldman Sachs and send them on their way, so that they might more briskly resume their quest for gainful employment. In hindsight, I misjudged their ability to see the reality of their situation, and of ours. At the time I accepted your strong suggestion that I never again try to speak directly to mortals -- or, as you referred to them, “The Morts.” Now our predicament is suddenly more dire. Ordinary Americans wish to control not just our pay but our core values:We at Goldman have long stood for the right of every prop group to trade against its firm’s customers. If we abdicate that right, who are we, deep down? In just the past few days many of us on the Goldman trading floor have wrestled with that question. We believe that rather than re-think our core values we should re-think our relations with the American public. Hence this memo. Your recent non-verbal signals -- your habit of passing directly behind my trading desk en route to the elevators, your selection of the urinal adjacent to my own -- convince me that you continue to value my thoughts. As it happens, I have recently conducted a thorough study of the culture of ordinary Americans. Please take the following ideas in the spirit in which they are intended: a team spirit.There is no “I” in Goldman Sachs, or in me. Nor will there ever be.

We have all seen the effects on the hearts and minds of our government officials and business leaders when they sense that our prosperity might one day be theirs. In the past year Warren Buffett has gone from being a leading critic of Wall Street to the greatest defender of Wall Street bailouts. Him we needed to pay hard cash -- most accept less. That’s perhaps the most curious trait of these ordinaryAmericans: you don’t need to give them any money to lead them to hope that you might. Take Larry Summers, for instance. We both know that we would never actually employ even this surprisingly intelligent Mort in anything but the most humiliatingly ceremonial role. But he doesn’t know that -- and thus he has done so much for us.

Ordinary Americans

Obviously we can never employ large numbers of ordinary Americans. But if you stop for a moment and think like a Mort you will realize that we don’t need to. We need only harness two more of his many irrational traits: overconfidence, plus a willingness to ignore the odds -- as evidenced by everything from his interest in the Lotto, to his belief in what he calls “love.” Each year, for example, Goldman Sachs might announce a grand national competition, much like “American Idol.”Finalists will appear before a national television audience to be judged by a panel of three rather ordinary looking Goldman executives. On stage they will perform various Wall Streettricks: negotiating with Tim Geithner, lobbying the Senate Banking Committee, designing securities that blow up, selling bonds to Germans, etc. The winner receives a job at Goldman Sachs. Which brings me to...

Big Idea No. 2: Give Morts the illusion that they have been admitted into our realm, and can now truly see who we are and what we do.

The winner of our national competition, for instance, might easily be attached to a small Web-enabled, head-top photographic device. Thus equipped he would become the eyes and ears of Morts everywhere. As he stumbles around our offices, attempting to understand that which is beyond his comprehension, he will no doubt create what ordinary Americans refer to as “comedy.”Morts love to laugh, to the point where they interpret our most straightforward remarks as occasions for humor. As we do not respond to comedy it will not disrupt the flow of our business, and we can encourage it. Let me say here that I, like every other Goldman trader, have admired the lengths to which you have gone to resemble an ordinary, non-threatening American. Your conscious decision to forgo muscle definition, along with your persistent hairlessness, has been nothing less than enlightened public relations.

Only So Much

But there is only so much one human being can do, even when that being is more than human. Our employees along this new interface with Mort culture should reinforce your subliminal message. They should be “normal looking” and trained to mimic the Mort’s strange, emotional responses to external stimuli. But the main purpose of any new personal contact with individual Morts is to address what is perhaps our biggestproblem: the new belief of ordinary Americans that they now, finally, understand what we do. That our work should be as simple as “facilitating productive enterprise,” or “allocating capital.” They have lost their former awe; we must restore it. Notice that they do not begrudge professional basketball players their vast salaries: they can see that those players are so unlike themselves as to constitute a different species. As our differences lie below the surface, they are harder for the Morts to perceive. Closer proximity to us, and our complexity, will solve this problem. They will soon weary of trying to comprehend what we do, and go looking for another outlet for their personal frustrations. Which brings me to my final thought...

Big Thought No. 3: Remind the Morts of their more natural resentments.

At the moment they mistrust us, perhaps even despise us, but their feelings toward us are new and thus shallow. They have had 30 years of training in hating their own government (the ultimate example of Mort irrationality). We must remind Morts that we share a common enemy: them.

Left hand the weekly NDX chart which has clearly turned around as it is the first time since this bear rally started that we had 3 weeks of consecutive declines and even produced a monthly reversal pattern. We are meeting good support in the 1750/60 area short term and we might bounce from that level ( less likely) - I rather opt for the version where we first close the old gap 1725-40 and bounce from the 1670 / 1700 level towards 1800 as we will have a strong 1-2 weeks period by mid Feb. - we will have to take it from that high for the next wave down as we arrive but the basic target remains for a retest of the lows but that may be delayed to 2011 depending on the last jokers Obama might pull out of his sleeve for the mid term elections but there are not many left. Interesting though is that people sell of volatility into this decline which is rather very brave ( since inside knowledge from PPT may be the factor) or very risky as clearly more downside is coming down the pipe. A test of the 200 day MA around 1550 is the minimum target.

First they (Rockefeller/ Rothschild gang) initiated the charade with TARP but as they saw that they had to give accountable information on how TARP would buy those toxic assets from which bank at what price they decided COP ( change of plans). The FED could do that secretly and uncontrolled and would not have to mark them according to any decent market rules. So they paid money out of TARP to banks as cash aid ( which they used to play along with loading up the yield curve trades) and ordered the FED to buy all the toxic garbage which they even could do in much bigger size than TARP would ever been able to - right now its more than double the amount MBS and Agencies amount to roughly 1.8 tril at the FED ( see chart below). Banks did unload big parts of their toxic assets at overvalued prices thats how thet managed to create trading gains ( just one of them) and the taxpayer is siting on roughly 2 tril garbage which even the FED claims it made a record profit on as they are the only buyer and mark prices to bubble levels but contain huge losses in reality. The biggest theft in history of mankind keeps on marching as the banksters even make profits by throwing their losses to taxpayers with everyone watching them - DC knows what is going on and let them do it.

Excerpt

The Federal Reserve's balance sheet hit a new all time record of $2.273 Trillion in assets, after a $13 billion increase in MBS and Agency purchases week over week.

Net borrowings: $165 billion. Number for the January 28th week has not been updated.

Float, liquidity swaps, Maiden Lane and other assets: $196 billion. The CPFF program was was at $11.2 billion, another fresh all time low. FX liquidity swaps declined by $1.075 billion to practically 0. Maiden Lane I and Maiden Lane II were at $26.8 and $15.4 billion, while Maiden Lane III continues pretending it has value and came at $22.5 billion.

Thursday, January 28, 2010

77 Senators did not live up to their duty because they are insane or corrupt - no reasonable excuse for an 'AY' vote so we can assume that the latter reason is the overwhelming ground for their vote. That he got nominated by Obama and also had appointed Geithner speaks volume who he works for despite all his snake oil salesman wit and speeches - actions speak louder than words.

Excerpt

Fed Chairman Wins Key Vote, Clearing Way for Confirmation

Federal Reserve Chairman Ben Bernanke won a key procedural vote in the Senate, clearing the way for his confirmation for a second term running the world's most powerful central bank.

The Senate is now moving to final confirming vote.

Getty Images

Federal Reserve Bank Chairman Ben Bernanke

Bernanke was expected to win the Senate's backing despite the stiffest opposition to any nominee for Fed chairman in the nearly 32 years the Senate has voted on the position.

Senators debating his nomination credited Bernanke with steering the U.S. economy through a wrenching financial crisis but leveled withering criticism at him for policies they argued sowed seeds for the turmoil and for an initial slow response.

"Bernanke fiddled while our markets burned," said Senator Richard Shelby, the top Republican on the Senate Banking Committee.

4. Senator Bunning is one of the few decent and ethic man in DC who also has the balls to speak out

Excerpt

I have no idea why these guys dont call out their fellow Senators as being bought and paid puppets. Bunning just simply say, " And I want the American people to be well aware of the majority who are voting in favor of Bernanke are voting with their wallets and the contributions made to them by banking. And I hope every 5pm news network sound bites this clip so they understand a vote by any elected Senator for Bernanke is a vote AGAINST their constituents. Wall Street just received record bonuses courteousy of their money. They caused this mess and YOU are suffering for it and all of you still unemployed look no further to the TARP payments and 0% rates and stolen wealth.And I am telling you as evidenced by Brown in MA anyone who votes for Bernanke will not be allowed a pass by the American people and the silent inflation Bernanke perpetuates.

5. Debt ceiling is raised to 100 % GDP and America is now at Banana-republic levels under prudent circumstances the rating had to be downgraded to BBB best case but still remains at AAA which is another proof that this rating charade does not work and is not supposed to work.

A mere three hours before the Bernanke cloture vote, America just got permission to hit 100% Debt/GDP. Thank Senate Democrats who just approved an amendment increasing the US debt ceiling by $1.9 trillion. The 60/40 vote was across party lines and only successful because Republican Sen.-elect Scott Brown has yet to be seated.

Democrats had to scramble to approve the plan, which means they won't have to vote on another increase until after the midterm elections this fall. To win the votes of moderate Democrats, President Obama promised to appoint a special task force to come up with a plan to reduce the deficit. The House must still vote on the measure before it's sent to Obama for his signature.

Excerpt 2

The Bernanke debate in the senate has started. Readers can watch it live on CSPAN.

The latest Bernanke tally is as follows (courtesy of Jim Bianco):

Per Dow Jones:

Voting “Yes”: 53 (38 Democrats, 14 Republicans, 1 Independent)

Voting “No”: 20 (5 Democrats, 14 Republicans, 1 Independent)

Officially Undecided: 21 (11 Democrats, 10 Republicans)

Unknown: 7 (3 Democrats, 4 Republicans)

Per Bloomberg:

Voting “Yes”: 51 (36 Democrats, 14 Republicans, 1 Independent)

Voting “No”: 22 (6 Democrats, 15 Republicans, 1 Independent)

Unknown/Undecided: 27 (16 Democrats, 11 Republicans)

Note Bloomberg includes Paul Kirk of MA (as a yes) and not Scott Brown.

6. Prechter claims what I can fully support from all angles that tough times are ahead in markets and you better get out now as I had written almost a year ago.

This MDAX chart is pretty much the same picture we have for many other charts as well - the support lines are getting tested as we speak and its only a matter of time until we break them with medium term target at 65/600. We have established a downtrend once we close below this trend on a weekly basis which should happen but we also will see a counter-trend around mid Feb which will make the bull camp believe the correction is over. We have no oversold conditions yet on daily charts and weekly charts are still overbought hence we have plenty more to go as the positive spin Astro pattern gave most of last year have faded away and a very tough one is right now shaping up. As I had written last year first and second quarter 2010 will be sharply down quarters and towards the end it might even get more ugly as a big crash type of event is what will be the theme for 2011. That's another year and for now markets will keep going down but may struggle around these levels for a brief time.

1. The Geithner and Paulson hearing was ashame for Geithner who just repeated over and over again the same statements some moron trained them to say and he as much as Bernanke have failed in their jobs as it was their job to oversee the investment banks who screwed up big time with runner up Goldman. The only moment Geithner lost his path was as he had to name some Goldman's he hired like his chief of stuff or who was never mentioned yesterday the current president of the NY FED Dudley also ex Goldman partner worked under him responsible for capital markets.Paulson denied he made 200 mio. as secretary in tax savings that's the downpay they aim for taking these jobs which are to their standards salary packages petty cash. Cramer also an ex Goldman claims Bernanke made everything right which is kind of pathetically stupid to say since Bernanke never saw it coming and did nothing a monkey could have done like putting interest rates to zero. Interesting though is the fact that Bernanke against the recommendation of his stuff demanded that AIG shall be bailed out and the stupid case that only 100% on the dollar could be payed is a stupid lie of all as its a matter of 5 minutes to say take 50 cents or get nothing and all banks would have agreed happily. Interesting was to see Clinton back up Bernanke with the argument that he claimed that B. has said that prior admins had installed a to lax oversight - kind of funny as he was the guy to cancel Glass Steagal.

2. Every Senator voting for Bernanke today is guilty of betrayal of the American people as this man has not lived up to the hyped duty of the FED chairman - which is owned by private banks and is not an agency of the USA as many may believe. He works for Rockefeller's and friends and has used his office to produce tens of billions of profits for banks on behalf of taxpayers. He betrays the American people with this bullshit inflation game and even more so with stealing wealth by issuing negative interest rates for the whole period he was chairman. The same is true for Greenspan who got paid of handsomely in a 'legal' way for his betrayal for pathetic speeches at banks with 250k price tags for one speech.

3. Economic numbers are clearly turning south again as the stimulus packages are loosing their impact and 23% without a job or full time job and over 25% negative equity on mortgage the economy cannot recover. DC buys time and pumps up the numbers but the fact is that the titanic has hit the iceberg. The only thing left to do before starting a war is hyperinflating by throwing money at Mainstreet in the way it was done for Wallstreet.

As I stated many times in earlier blogs when a government goes ahead and understates inflation i t will automatically raise GDP to phony numbers as the more consumption which is nothing else but higher prices will create the illusion of growth. The USA is a master in cooking books and restarted the betrayal again under Clinton with the evil Greenspan who is responsible for most of todays disasters from an administration perspective. Obviously his masters like Rothschild and Rockefeller who benefited from this developements are the real masterminds behind it as they just establish a corrupt administration to execute their agenda.

In countries like China where they build an empty city to print GDP higher or Japan who rebuild the same streets for a 3rd time to pump up the numbers are just wasting effort and resources and doing nothing but a Ponzi scheme on global level. Japan lives on zero interest rates for 2 decades that's why they are still are not bankrupt but as a matter of fact they are since they never can repay their debt which is now true for all developed countries after this bailout plus the baby boomer social care debt looming.

Excerpt

The Truth Behind GDP

On Friday, the Bureau of Economic Analysis will release its first estimate of Gross Domestic Product (GDP) for the fourth quarter of 2009. It’s widely expected that the number will be a positive 4% to 5%. That will be the second consecutive quarter of positive GDP growth, which “officially” means that the recession is over.

The talking heads will greet this number with great enthusiasm. They will interview members of the administration, which will greet the number with even greater enthusiasm proclaiming that a long period of steady economic growth is right ahead of us, all of which is due to its economic policies and actions.

Yeah, right.

In advance of this stellar achievement, I thought it might be useful to look at how the two most important economic indicators, GDP and the unemployment rate, are calculated. I have to admit I forgot the definition of Gross Domestic Product (GDP) from my undergraduate economics class, so if you also forgot, or skipped class that day, here it is:

GDP = C + I + G + (X-M)

C = Private consumer consumption, basically all the goods and services you buy

I = Investment, which includes business investment of plant, equipment, inventory, structures, etc. It doesn’t include investment in financial assets (your day trade that you accidentally held overnight does not contribute to GDP).

G = Government spending, all salaries, military, and investment, but no transfer payments, such as social security or unemployment benefits.

X = Exports

M = Imports

You might have noticed that there’s no consideration of debt, either personal or government, in the calculation of GDP. So, if the government spends like crazy (which it is), that spending will boost GDP.

China’s fourth quarter GDP came in at 10.7% -- to pull that off you need to do stimulus right. There’s no better example than this video. Every brick in that empty city is pure GDP. That stimulus makes our Cash for Clunkers and road repaving look pretty trivial.

GDP increased 2.2%, but most of that increase, 1.45%, was due to increased automotive purchases, obviously due to the Cash for Clunkers program. So a “G” program drove an increase in “C” without a subtraction of the increased national debt that was created by Cash for Clunkers. For actual numbers, click here.

Table 3 shows the actual numbers in billions of dollars. The quarterly numbers are seasonally at annual rates and the headline reported numbers are from the chained 2005 dollar column, which adjusts them for inflation. Look at two lines (shown here) in the Personal Goods section, motor vehicles and recreational goods and vehicles (SUVs fall into this category).

In the second quarter, total sales in these two categories fell $9.7 billion from the first quarter. In the third quarter, they increased by $45.4 billion from the second quarter. Because that's an annualized rate, the clunker program generated an additional $11 billion in sales at a cost of $3 billion. Whether or not you believe it was a good program, it did work and produced a pretty good multiple on the cost.

Total GDP increased $71.5 billion in the third quarter, but Personal Consumption only increased $63.6. Subtracting Clunkers leaves only $18.2 billion. Scanning all the other goods and services categories shows, on average, small gains and losses, the biggest of which was food at $6.6 billion -- not exactly an area where consumers enjoy spending more money. Overall, I'd hardly call it the start of the end of the recession for consumers.

The problem with GDP is that it doesn’t represent what the average American family is feeling. Much closer to consumer sentiment is the unemployment rate. You might think that the GDP calculation -- trying to get all spending and investment from all sectors -- would be difficult, but in reality, GDP has three months to get the final revision in, while the unemployment rate has little more than two weeks to be guessed at.

Wednesday, January 27, 2010

5. Its like a Mafia hearing Geithner and Paulson had nothing to do with it and know nothing about it attitude - they only saved us one gimmick by not saying the famous sentence ' not to my recollection' - who ever prepared them for this hearing has done a pathetic approach of defense but the more intriguing aspect is rather that both explicitly as they acted had taken care already that they could take that position - the had covered their asses.

6. The tablet is as I though just a big expensive iphone and will not be a blockuster - have not seen the price but the closer it is to 1000 the less it will sellpart 2 updateSteve was smart to price it at the right level without contract it starts at 629$ since it has an LED screen he will have lesser margin but enough margin for contribution and sell quite a few but the specs are not that spectacular as the speed and storage are limited at this version it can not kick ass of netbooks but compete with the highend ones but kindle will loose plenty potential buyers as one gets a kind of netbook plus a kindle experience with plenty of Iphone Apps it does smarts out many things one uses for travel. As it does not run leopard or windows it can not steal all the thunder from netbooks for people who need to run standard applications.

Prices start at 499 which is a very good starting point as it directly attacks the DX kindle with not a lot of storage space though and less battery power but you get the more sophisticated gadget and kindle will have to lower prices to compete. Although the 3g version costs 629 at Apple but one gets a far better system for your bucks as music films and surfing is value added.

7 Another hype of Goldman goes down the drain US steel crashes as did the Amzn Feb 140 call did never make profit and the VIX short recommendation blew into their face - people who still listen to their advice must be insane or get paid to do the wrong things.

1. why do they still have this davos charade - it should be changed to tel aviv than most participants can see family member s during the breaks and confess their sins to the Rabbi and the ladies in Israel are anyway much prettier.

2. barney frank that rotten corrupt ... bank lobbyist says any reform as proposed by the volcker rule would be watered down and implemented over a time span of 3-5 years - such an approach would not make it over the mid term elections mr president - democrats still loose majority. Probably its just a distraction from the bonus pays who are happening as we speak. when obama made the phony clap on volckers arm as they presented the 'rule' it was clear that he makes another snake oil salesman pitch.

3 the price action of the last days is very clearly pointing to more downside and as ı had said earlier that goldman the stock would be an indicator for the whole market it has reached the 200 day ma as should the market in a few weeks.

4. ı love aapl products but the hype around the tablet, especially priced above 600$ it will not be a big contributor, occurs strange to me. it will not be such a quantum leap as the ipod and iphone were.. ıt will be a headache for the kindle though but its a niche product not a blockbuster.

Tuesday, January 26, 2010

Any official supporting those two gentlemen should consider the same action or be prosecuted for supporting deception and betrayal.

Excerpt

Presenting The BlackRock-AIG Presentation In Which It Becomes Clear That Soc Gen Had Pledged Sub-50 Cent Securities To The Fed's Discount Window

Many of you asked for the BlackRock presentation that disclosed Goldman's desire to tear up AIG CDS contracts at a concession (i.e., discount), so here it is.

Some of the notable highlights first - as BlackRock points out on page 8 of the presentation:

Negotiating Position: Goldman Sachs is the least risk averse counterparty, i.e., the only counterparty willing to tear up CDS with at agreed upon prices and retain CDO exposure

Goldman approached AIG in August to discuss tearing up the CDS contracts

BlackRock has advised AIG on tearing up 9 CDS in the Goldman portfolio with a $3 billion notional

These transaction were selected because they were distressed portfion likely to experience credit events and convert to cash positions in the next few years (converting to cash position reduces any basis between the CDO and CDS values)

The bid-offer spread between AIG and Goldman on these CDS tears-ups is $300 million

Concession: Goldman would likely accept a small concession but may look to its funders to absorb the loss (or a portion of the loss)

Goldman's exposure to AIG is limited to the difference between collateral requested (what they are likely posting to swap counterparties) and collateral received at any given time from AIG. While hedging this AIG counterparty risk is expensive, the cost would translate into no more than 2 points on the whole portfolio

Goldman's swap counterparties are exposed to Goldman Sachs rather than AIG counterparty risk, and are therefore less likely to be receptive to deep concession

Access to the Assets: Goldman has said that it does not hold the cash CDOs, but has back-to-back swaps on most of the positions

Other factors

Because Goldman prices have been consistently lower than third-party prices, Goldman and AIG have negotiated a collateral posting protocol in which Goldman's prices are given a 12% positive haircut for collateral posting

Goldman's requested collateral margin, therefore, is generally 12% higher than the agreed collateral posting at any given time

This is why Goldman may have been willing to tear down contracts - in essence it would have had a loss buffer of up to12% more than prevailing market prices on the CDOs, so even a protection tear down would have resulted in the ability to take incremental losses on the underlying (assuming it was still held at AIG). Not only that, but Goldman's aggressive margin requirements were in a league of its own:

$1.3 billion in additional collateral has been requested, but not posted as of 10/24

Goldman's collateral request does not reflect any haircut to Goldman prices per the protocol established with AIG, so at least a 12% gap attributable to the haircut will remain as long as the haircut protocol is effective

In layman's terms, what all this means, is that Goldman would have indeed been willing to accept tear downs due to the excess buffer (positive haircut) arrangement the firm had in place with AIG. Indeed, the firm had downside protection all the way down to at least 12% below fair value as determined by all other AIG counterparties (granted, in such an extremely illiquid market as CDOs nobody knew what price these securities would print at, especially if trades were done in the size discussed). Furthermore, according to BlackRock, Goldman was wise enough to offload the actual CDOs to clients, and was exposed merely through "back-to-back swaps on most of the positions." This means that Goldman only was exposed purely to counterparty risk on AIG's behalf - should AIG default, Goldman would become the client-facing entity guaranteeing "pass through" sold CDS.

Yet one wonders just how many billions of dollars Goldman had in margin variation between collateral posted to it via AIG, and how the amount of money it had paid to buyers of CDS sold by Goldman. We are certain that since no Goldman client had the same negotiating power as Goldman did with AIG, Goldman likely had a positive balance in the hundreds of millions if not billions simply on the collateral variance.

As page 10 indicates, whereas all counteparties had requested collateral at a price for the underlying CDOs of 49, Goldman was extremely aggressive, demanding collateral for a price-equivalent of 37. The latter compares to a BlackRock model price for Goldman of 44, meaning that even the Fed's advisor in good faith could not recommend such a generous treatment of Goldman in the context of all its other counterparties. Were Goldman to receive the same collateral as everyone else, it would be due 8.1 billion: $1 billion less than the 10/24 collateral request.

Now keep in mind, that of the top 5 counterparties, SocGen, GS, Deutsche Bank, Merrill and Calyon, only Goldman had subsequently sold off its entire CDO book: once again implying that unlike the other 4 firms, who at least held the exposure on their own balance sheet, and thus one can say deserved to receive some insurance, Goldman had bought then sold its entire portfolio, in essence making Goldman nothing than an AIG conduit, which was fully hedged and, as noted above, only had counterparty risk, yet which had the benefit of up to $1 billion in excess cash on its books due to day-to-day marking of its CDS exposure and its advantage collateral arrangement.

Futhermore, as Goldman owned CDS on AIG itself (as a counterparty hedge), Goldman had absolutely no risk in its relationship with AIG whatsoever!!! Of course, It is critical to remember that Goldman not only received par between the collateral previously posted to it, and actual cash from Maiden Lane III, it also made billions by selling actual AIG CDS (which as we claimed previously was done while in possession of material non-public information). Amusingly, while Goldman bought all of its CDO protection from AIG exclusively, it definitely used a very broad seller base when it loaded up on the actual AIG protection. Therefore, Goldman's only, ONLY risk, was that of a complete systemic collapse and the repudiation of all contracts, CDS and otherwise.Which is why Goldman's various agents did everything they could to prevent that from happening, up to and including loading the Federal Reserve with trillions of toxic debt in the upcoming 12 months.

And speaking of the Federal Reserve, while reading the SocGen section, we came across this little stuner on page 3:

We have heard second-hand from a trader that Soc Gen has pledged much of the portfolio to the Fed discount window for future liquidity

Aside from the fact that in October 2008 France-based Soc Gen was not a Primary Dealer (it only just applied for this position a few weeks ago), one needs to turn to page 5 of the presentation to realize that Soc Gen's portfolio had a value of 49 cents on the dollar. What this implies is that in October of last year (and ostensibly prior) Soc Gen, a foreign, non Primary Dealer, had access to the Federal Reserve's Discount Window, where it had pledged securities that had a value of 49 cents on the dollar, and for which the Fed would have taken arguably no haircut, thereby funding the French firm at par for securities that were worth less than half, and which the taxpayer was on the hook for. Indeed, these securities may well have been completely worthless: lower on page 3 we read:

Soc Gen and AIG are currently in dispute over existing events of default and credit events under transaction [ineligible] for 2 deals, totaling $650 million of notional exposure.

We would not be at all surprised if the defaulted securities were part of the crap that had been given to Tim Geithner, at the time head of the New York Federal Reserve.

And what Soc Gen was doing by pledging reference assets to the Fed, we are certain that all the other counterparties (those which unlike Goldman still held on to the securities) were doing as well.

The fact that the Fed was willing to risk taxpayer capital with such reckless abandon, first in the form of accepting literally worthless reference securities from Soc Gen (as documented by BlackRock), and subsequently by bailing out Goldman at well over par (remember the money the firm made on its actual AIG counterparty-risk) protection, would have been sufficient to terminate Geithner's career in any self-respecting banana republic. Too bad America is no longer even that.

How Paulson's People Colluded With Goldman To Destroy AIG And Get A Backdoor Bailout

Too Big To Fail is revelatory, though not in the way Andrew Ross Sorkin intended. The book offers startling evidence that Hank Paulson and his deputies colluded with Goldman to create a liquidity crisis at AIG, and to manipulate the government funding a backdoor bailout of AIG's CDO counterparties, most notably Goldman. It's not that Sorkin's sources recounted the truth. Quite the opposite. Rather, they told him stories that were so transparently dishonest that the truth emerges by way of negative implication.

To understand what happened, you need to remember that the top guys at Goldman are really, really smart. They are like champion chess players who anticipate the possible moves of their opponent. The guys at Goldman can quickly grasp how pieces of a financial transaction work together, like the pieces on a chessboard, to game out different scenarios. This attribute is not unique to the guys at Goldman; it's an essential quality of every good banker. But it does mean that the guys at Goldman cannot credibly profess to being oblivious.

The other thing that you must remember is that the dagger hanging over AIG and Goldman -- the eventual payout to the CDO counterparties -- was a zero-sum game between the two financial giants. On June 30, 2008, AIG's net worth was $79 billion and its CDO obligations totaled $62 billion. On August 27, 2008 Goldman's net worth was $42 billion and its share of the infamous CDO portfolio was $22 billion. The stakes were huge.

Also, none of the critical elements that led to AIG's demise were obscure. In retrospect they seem quite obvious. Unfortunately, few in the financial media have attempted to understand those critical elements.

Before we get to the liquidity crisis at AIG, we need to go back to that special relationship between Goldman and AIG...

Goldman bought credit protection exclusively from AIG because:

Like its peers, Goldman underwrote billions of dollars of toxic securities known as subprime collateralized debt objections, or CDOs, and simultaneously bought credit protection on those CDOs in the form of credit default swaps. But Goldman was unique in that it only bought protection from AIG Financial Products, or AIGFP, and no one else. Under normal standards of risk management, this approach is imprudent; a bank should diversify its risk exposures whenever it can. Given that AIG was Goldman's biggest client, and that the CDO exposure at AIG was a huge part of Goldman's equity base, it's inconceivable that Hank Paulson, Goldman's CEO until June 2006, would not have been regularly briefed on this matter. The same goes for Goldman's board of directors. It's a very basic and essential part of any bank's risk management and corporate governance.

It's also a basic tenet of risk management to game out the different scenarios under which Goldman might seek recovery under its credit default swaps. Based on that analysis, the choice to deal exclusively AIG, in retrospect, seems very obvious, for four reasons set forth below.

This is one of those really basic things that few in the media seems to grasp. The other large companies offering credit protection on the CDOs were the monoline insurance companies, names like MBIA or AMBAC. AIGFP was not regulated, whereas the monolines were. A regulator can order an insurer to withhold any payout that might impair that company's ability to service its other policyholders. That's precisely what the New York State Insurance Department did last April, when it ordered Syncora, the monoline formerly known as XL Capital Assurance, to suspend payments. This state's regulatory authority to interfere with the terms of a contract proved to be a powerful hammer. It incentivized the CDO banks to negotiate haircuts on their claims throughout 2008.

A lot of people compare the settlements with the monolines with those at AIGFP and wonder why the monolines negotiated better deals. But in fact, they are comparing apples and oranges. The only government entity legally authorized to interfere with AIGFP's contracts was a bankruptcy court. But even that authority had been seriously curtailed.

2) AIGFP was willing to post cash collateral, which was outside the grasp of a bankruptcy judge;

Here's another very basic thing. The credit protection sold by the monolines included financial guarantees as well as credit default swaps, whereas AIGFP extended only credit default swaps. A credit default swap is a financial derivative. One of the common, and insidious, attributes of financial derivatives is that a counterparty may need to post margin, or cash collateral, whenever the spot value of its contractual claim turns negative. Here's an overly simple example: Suppose AIG promised to sell Goldman one barrel of oil on January 25, 2011 for $80, and then on June 25, 2010 spot price is $100 (i.e. an implicit $20 loss). AIG would post $20 in collateral with Goldman. If the spot price falls to $65 on July 25, then AIG would get its $20 collateral returned, and also receive $15 in collateral deposited by Goldman.

As a rule the monolines were unwilling to sign any contract that required them to post collateral. They accrue insurance reserves and, again, insurance regulation is predicated on the idea that one policyholder 's recovery not should leapfrog ahead of all the others. But that's precisely the idea behind posting collateral on a derivative. If AIGFP filed for bankruptcy, Goldman would be entitled to immediately liquidate the credit default swap and permanently keep its cash collateral; a bankruptcy judge could not touch it. The recently amended bankruptcy code clarified the special priority given to derivative counterparties over other creditors.

So, as you would expect, It wasn't simply the support of the regulators that gave the monolines the upper hand in negotiating with the CDO counterparties; it was also the fact they they held the cash.

3) AIGFP would have been wiped out by a bankruptcy filing, because it was active in financial trading;

There's another reason why the monolines had the upper hand, whereas AIGFP did not. Bankruptcy was always a viable option for the monolines, whereas it was not for AIGFP. Aside from its book of business providing credit support for CDOs, AIGFP was very active in all sorts of financial trading of all sorts of derivatives. The monolines were not really involved in that business.

The vast bulk of business done by financial traders is hedged, meaning there are always two back-to-back contracts. Another overly simple example: If AIG promised to sell Goldman one barrel of oil on January 25, 2011 for $80, AIG would simultaneously contract with Morgan Stanley to buy one barrel of oil on January 25, 2011 for $78, and lock in the $2 profit. Throughout the next 12 months, any profit from one contract would correspond to the loss on the other. But if AIG filed for bankruptcy on June 25, 2010, Goldman could choose to liquidate its contract and hold on to its collateral, whereas Morgan Stanley might still insist of selling the oil on the later delivery date. The hedge would then become unwound, and suddenly expose AIG to a huge trading loss.

The preferential treatment given to derivatives subverts the entire purpose of a bankruptcy filing, which is to buy time for an orderly restructuring. For AIGFP, the downside risk of a bankruptcy filing was vast and unknown, which was not the case for the monolines.

Because Goldman is very savvy about trading risk, it must have mapped out an endgame enabling it to declare "checkmate" once AIG were backed into a corner.

4) AIG did not understand what it was doing; it relied on the rating agencies.

But if Goldman was so smart, how could AIG be so dumb? There's a short answer and a long answer. The short answer is three little letters: AAA. The long answer gets to the same result; it just takes a longer while to get there.

According to Michael Lewis's reporting in Vanity Fair, the guys at AIGFP were clueless:

Toward the end of 2005, Cassano [the head of AIGFP] promoted Al Frost, then went looking for someone to replace him as the ambassador to Wall Street's subprime-mortgage-bond desks. As a smart quant who understood abstruse securities, Gene Park was a likely candidate. That's when Park decided to examine more closely the loans that A.I.G. F.P. had insured. He suspected Joe Cassano didn't understand what he had done, but even so Park was shocked by the magnitude of the misunderstanding: these piles of consumer loans were now 95 percent U.S. subprime mortgages. Park then conducted a little survey, asking the people around A.I.G. F.P. most directly involved in insuring them how much subprime was in them. He asked Gary Gorton, a Yale professor who had helped build the model Cassano used to price the credit-default swaps. Gorton guessed that the piles were no more than 10 percent subprime. He asked a risk analyst in London, who guessed 20 percent. He asked Al Frost, who had no clue, but then, his job was to sell, not to trade. "None of them knew," says one trader. Which sounds, in retrospect, incredible. But an entire financial system was premised on their not knowing--and paying them for their talent! [Emphasis added.]

It seems less shocking if you understand how these CDOs were put together and sold. Take a few minutes and glance over the prospectus for Davis Square Funding VI, one of the dozens of CDOs structured by Goldman before the risk was laid off on AIG. You could spend all day studying the document, but you will never be able to answer the question, "What am I buying?" The document doesn't tell you. That's the point. It's evident in every aspect of this document and the offering circulars for most of the other CDOs. The business purpose, the essence of the deal, can be summarized in one word: obfuscation.

Goldman argued that these CDOs were put together to meet market demand, but demand for what? These subprime CDOs were not financing anything (the underlying mortgages and mortgage securities had already been financed), nor were they promoting liquidity in the marketplace (they couldn't be traded because nobody knew what was in them).

If you wanted to invest in a diversified pool of subprime mortgages, there was no reason to waste hours and hours studying the impenetrable documentation of a CDO. Instead, you could look into any subprime mortgage deal, like MASTR Asset Backed Securities Trust 2005-NC2. Skim the prospectus for five minutes, and you know that the deal is comprised of 3,380 subprime mortgages, all of which were originated by New Century Financial, 55% of which were in California, 100% of which are interest only, 60% of which closed with second liens, 58% of which relied on "stated documentation," and 83% of which had prepayment penalties. If you don't like MASTR 2005-NC2, you can easily compare it with hundreds of other stellar transactions.

Remember, AIGFP only assumed risk exposure on the "super senior" classes, or tranches, of these CDOs. They only assumed the risk on paper that was rated AAA. Therein lies the faulty assumption that AIG and almost everyone else made before they ever started slogging through the impenetrable documentation. It's rated AAA so you don't need to worry about the details. The offering circular for Davis Square Funding VI is just like the offering circular for Davis Square Funding VII and countless other CDOs. It tells you Moody's Expected Loss Rate on a credit rated AAA. After 20 years, the cumulative loss is 0.02 percent. It doesn't tell you that the deal was structured to make a sham of the due diligence process.

People who bought these CDOs looked at the ratings and almost nothing else. They relied on Goldman and the rating agencies to make sure that everything was OK.

Which again brings us to the issue of posting collateral. As a matter of policy, financial institutions rated AAA or AA almost never agree to post collateral on their derivative trades. (That's one reason why big banks find trading to be so profitable.) The only reason why the guys at AIGFP would have ever agreed to post collateral back in 2005 or 2006 is because they thought there was no way in hell that these CDO tranches rated AAA would never be valued at anything below par.

But Goldman's credit default swaps would not trigger a bankruptcy, because there was no way to figure out their market value.

But Goldman met with limited success, for obvious reasons. The idea that these CDOs could be marked to market is a joke. There never was any real market of buyers and sellers of these things. AIG's auditor, PricewaterhouseCoopers, and the Fed's auditor, Delloite & Touche, determined under fair value accounting rules that there was no way that the CDO obligations could be valued according to any market benchmark.

AIG and Goldman had spirited talks over the amount of posted collateral for over a year, but those talks had remained at an impasse. No one could agree on the CDOs' "market value." So long as AIG was solvent, the inability to quickly ascertain the CDOs' value worked in AIG's favor. Later, when AIG faced a liquidity crisis, the inability to quickly ascertain the CDOs' value worked against AIG.

Various side deals mask the true magnitude of Goldman's participation in AIG's CDO portfolio.

According to the AIG memo on CDO exposures, dated November 27, 2007, obtained by CBS News, Goldman's CDOs represented about a third of the $67 billion total. But that may have been understating Goldman's role in building up the portfolio. About 16 of Societe Generale's trading positions were for CDOs that were arranged by Goldman. Apparently, one way that Goldman would offload CDOs would be to sell them, along with credit protection from AIG, as a package deal. In other words, some of the banks never seriously intended to hold the CDOs in the first place. But Goldman used them as a front for its own syndicating efforts.

Later, around the time Tim Geithner was brought in to settle the CDO matter, Goldman pulled another stunt to make it appear as if its CDO exposure to AIG was smaller than it actually was. The transaction is alluded to in a couple of obfuscatory paragraphs (pages 16 and 17) in Neil Barofsky's SIGTARP report on the AIG bailouts. It appears as if Goldman suddenly sold $8 billion in CDOs to Deutsche Bank, so that it would appear as if Goldman's share of the total would look smaller. But the only way that Deutsche Bank would have bought the stuff is if there were no risk involved.

On September 15, 2008, the rating agencies thought that AIG's CDO portfolio looked just fine.

The Washington Post printed a 2,700-word article about AIG's internal e-mails during 2007, when the guys at AIGFP kept insisting that the CDOs did not present any kind of troublesome risk. But the Post left out a critical element in the narrative. At that time, virtually all of the 148 CDO trades, listed in a November 27, 2007 memo obtained by CBS, were still rated AAA.

In fact, most of these CDOs were first downgraded in May 2008, the same month that AIG was downgraded from Aa2 to Aa3. At the time, the CDO downgrades were fairly insignificant. Of course we don't know why the CDO downgrades occurred when they did, because we don't really know what's inside of them. But consider how bad the damage was by May 2008. Among the subprime bonds that comprised the ABX 2006-1 index, the average foreclosure rate was already 25%.

Was AIG really too big to fail? Maybe if you worked for Goldman.

The party line, expressed in Too Big To Fail and elsewhere, is that an AIG bankruptcy posed a greater systemic risk than a Lehman bankruptcy, because AIG was so much bigger. But that analysis is highly superficial and very misleading. AIG itself was a holding company, which guaranteed the debt of its unregulated financial subsidiary, AIGFP. The lion's share of AIG's revenues and profits, and about 80% of its consolidated assets, were concentrated among its different insurance company subsidiaries. Those insurance companies were solvent. They did not pose any systemic risk. In fact, it's quite likely that they would have continued to operate outside of bankruptcy.

The only subsidiary with major problems was AIGFP, whose financial obligations were guaranteed by the parent. But AIGFP was only about one-third the size of Lehman. It's almost impossible to see how AIGFP ever posed a systemic risk, unless everyone's intention to provide a backdoor bailout to the banks. Put another way, it seems that the only reason that the government needed to step in for AIG was to provide a backdoor bailout to its banks.

Goldman's scheme to create a liquidity crisis at AIG, in order to manipulate the government into paying CDO counterparties 100 cents on the dollar

Because of laws that emasculated regulatory oversight, Goldman's trading positions in credit derivatives with AIG had escaped the scrutiny of the Fed until September 11 or 12, 2008, when AIG told the New York Fed that it would soon run out of cash. The CDOs did not trigger a liquidity crisis at AIG, at least, not directly. Rather, it was the imminent cash drain from anticipated downgrades, from AA- to A-, which would trigger $30 billion in new collateral postings on AIGFP's trading positions. In addition, someone at the company had screwed up. They had invested billions in cash collateral, intended for someone else, in highly rated mortgage securities, for which there was suddenly no liquid market. So AIG needed to come up with the cash right away.

Simultaneously, of course, Lehman Brothers was imploring the government for support, and Paulson's position, at least on September 12, 2008, was that the Federal government would provide no support of any kind to bail out a private company like Lehman or AIG. Private bankers must come up with a private solution on their own.

On September 15, 2008, the same morning that Lehman's bankruptcy sent shockwaves, Geithner had convened a meeting with JPMorgan Chase and Goldman to work on an emergency bridge financing for AIG. Why include Goldman? Traditionally, the bank with the largest credit exposure to distressed borrower helps arrange the debt restructuring. Geithner opened the meeting, and left soon thereafter, leaving Paulson's deputy, Dan Jester, in charge. Jester was a former Goldman banker whom Paulson had plucked in July 2008 to work on matters that concerned Paulson.

"Look, we'd like to see if it's possible to find a private-sector solution," Geithner said addressing the group. "What do we need to do to make this happen?"

For the next ten minutes the meeting turned into a cacophony of competing voices as the banks tossed out their suggestions: Can we get the rating agencies to hold off on the downgrade? Can we get other state regulators of AIG's insurance subsidiaries to allow the firm to use those assets as collateral?

Geithner soon got up to leave, saying, "I'll leave you with Dan," and pointed to Jester, who was Hank Paulson's eyes and ears on the ground. "I want a status report as soon as you come up with a plan."

A critical point here is that Pauslon's deputy, not Geithner, sat at the table to lead government negotiations.

Job 1 was to persuade the rating agencies to forestall their anticipated downgrades, which would have burned up billions because of increased calls to post collateral. This task was assigned to the government's representative, Dan Jester.

"He was as useless as tits on a bull." [AIG CEO] Bill Willumstad, normally a calm man, was in an uncharacteristic rage as he railed about Dan Jester of Treasury, while telling Jamie Gamble[a lawyer at Simpson Thatcher] and Michael Wiseman [a lawyer at Sullivan & Cromwell] about his and Jester's call to Moody's to try to persuade them to hold off on downgrading AIG.

Willlumstad had hoped that Jester, using the authority of the government and his powers of persuasion as a former banker, would have been able to finesse the task easily.

Willumstad explained that the original plan "was that the Fed was going to try to intimidate these guys to buy us some time." Instead, when Jester finally got on the phone, "he didn't want to tell them." Clearly uncomfortable with playing the heavy, Willumstad told them that Jester could only bring himself to say, "We're all here, and, you know, we got a big team of people working and we need an extra day or two."

If Jester spoke to Moody's the way Willumstad said he did, then there is no doubt in my mind that Jester intended to sabotage the deal. No other explanation is plausible. The importance of the phone call was not unlike that of a death row lawyer seeking a last minute stay of execution. Jester had been the Deputy CFO at Goldman. It would have been his job to deal with the rating agencies regularly. There is no way that he would not have known what to say. All he would need to say is that since AIG's last meeting with Moody's, the situation is evolving in a way so Treasury and the Federal Reserve are feeling increasingly confident that the deal being hammered out will significantly ameliorate the company's liquidity issues. Everyone knows that the rating agencies do not like to abruptly pull the trigger when a situation is still evolving. Everyone also knows that the rating agencies are acutely aware of their chicken/egg role they play in determining a firm's liquidity situation. (A company has access to the capital markets because of its rating, but its rating reflects its access to the capital markets.) Also, as Janet Tavakoli once mentioned, investment banks train their analysts about how to place pressure on the rating agencies. Finally, it would not have been indelicate to allude to the agencies' no-so-clean hands in building up the AAA pyramid scheme known as AIGP's CDO portfolio.

An in case there were any doubt that Jester's refusal to act as an advocate for AIG made the critical the difference, here's how Jimmy Lee, of JPMorgan Chase, tallied the numbers on the morning following the downgrades. "They [AIG] have $50 billion in collateral and they need $80 to $90 billion. I don't know how we can bridge the gap." Because of the ratings downgrades, AIG posted an additional $32 billion by quarter's end. In other words, they would have needed about $32 billion less if the downgrades had not taken place.

Minutes after Jimmy Lee briefed his boss, Jamie Dimon. Geithner, Jester Lee and the people from Goldman sat down to figure out what to do next.

September 16, 2008: Paulson installs a CEO at AIG who will favor Goldman.

And a few minutes after Goldman, JPMorgan Chase and the government tried to figure out what was next, at 9:40 a.m., September 16, Goldman CEO Lloyd Blankfein placed a call to Hank Paulson, which Paulson took, even though such communication was illegal. According to Sorkin's sources, they discussed Lehman and not AIG. Just at the moment when the government was deciding whether to step in and save AIG, Blankfein never mentioned that an AIG collapse could have easily wiped out $15 billion in Goldman's equity and caused everyone to scrutinize the dodgy CDOs underwritten during Paulson's tenure. Do you think they just forgot?

As it happened, a few minutes after Paulson got done speaking with Blankfein, Geithner briefed Paulson about a tentative proposal for the government to extend AIG an $85 billion facility. The conversation with Geithner ended at 10:30 a.m.

Sorkin's sources fabricated a tall tale about what took place afterward:

However resistant Hank Paulson had been to the idea of a bailout, after getting off the phone with Geithner, who had walked him through the latest plan, he could see where the markets were headed and that it scared him. Foreign governments had already been calling Treasury to express their anxiety about AIG's failing.

Jim Wilkinson [Paulson's deputy, formerly of the White House Communications office] asked incredulously," are you really going to rescue an insurance company?"

Paulson just stared at him as if to say only a madman would stand by and do nothing.

Ken Wilson, his special advisor, raised an issue they had yet to consider. "Hank, how the hell can we put $85 billion into this entity without new management?"-- a euphemism for how the government could fund this amount of money without firing the current CEO and installing its own. Without a new CEO, it would seem as if the government was backing the same inept management that had created this mess.

"You're right. You've got to find me a CEO. Drop every other thing you are doing," Paulson told him. "Get me a CEO."

Their choice: Ed Liddy, the former CEO of Allstate and Goldman board member.

The "same inept management that had created this mess"? It's impossible to overstate the mendacity embedded in that brief passage from Sorkin's book. If Paulson actually spoke what was on his mind at the time, the words would have been something like this:

"So if we don't bail out AIG, then Goldman takes a $15 billion hit to its equity and faces shareholder lawsuits for actions taken under my watch. And Willumstad, the new AIG CEO who joined management after all these toxic CDOs were booked, will find it very convenient to also point the finger of blame at Goldman. [Willumstad joined AIG's board in April 2006, and became CEO in June 2008.] The AIG bankruptcy trustee might even sue Goldman for making fraudulent claims about the CDOs, the same way that HSH Nordbank sued UBS and M&T Bank sued Merrill.

"But if we bail out the company, there's still no guarantee that Goldman can recover on the CDOs. And Willumstad can still point the finger at Goldman. So before we agree to anything we've got to get rid of Willumstad ASAP and replace him with someone who will make sure that Goldman's interests are being looked after. Let's use Ed Liddy. He's a Goldman board member, so he will never disclose anything that makes Goldman look bad. If he wants to preserve the value of his Goldman stock, he'll discreetly pay off the CDOs before anyone figures out what's happening. So I decided Willumstad's replacement will be Liddy, beginning tomorrow, and I don't give a damn that my unilateral decision to change CEOs overnight is a complete travesty of corporate governance or government accountability. Our story will be that we are replacing the management that created this mess."

How do I know that this was on Paulson's mind and that these were his motivations? As noted at the beginning, the guys at Goldman are very smart, and they knew that the CDO settlement was a zero-sum game. Remember, AIG was Goldman's biggest client and the issue of collateral postings had been in dispute for over a year. Up until June 2008, Ken Wilson was CEO of Goldman's Financial Institutions Group. There is absolutely no way that Wilson did not know what was going on with AIG's management, and that Goldman, not Willumstad was primarily culpable for building up the CDO portfolio.

Also, I've been a round the block a few times. Whenever faced with a crisis, senior people immediately think about how the situation will reflect on them. And they promptly think about damage control. And like many people who rise to the top, Paulson knows how to avoid leaving fingerprints. He probably learned his lesson decades earlier, working as John Erlichman's assistant. Like those other famous CEOs, Bernie Madoff and Donald Rumsfeld, Paulson never used e-mail at work. The day after he fired Willumstad, Paulson spoke on the phone with Blankfein five times.

Whoever bore the blame for creating the mess at AIG, it's extraordinarily reckless, during the middle of a crisis, to immediately install a CEO with no prior experience at the company, which is a huge sprawling conglomerate. That's especially true when that new CEO has a conflict of interest the size of the Grand Canyon.

Sorkin also makes clear that it was Jester, not Geithner, who took control in structuring AIG's bailout facility. Before Geithner gets on a conference call with Bernanke:

Jester and [Paulson's assistant Jeremiah] Norton were poring over all the terms. They had just learned that Ed Liddy had tentatively accepted the job of AIG's CEO and was planning to fly to New York from Chicago that night. To draft a rescue deal on such short notice, the government needed help, preferably from someone who already understood AIG and its extraordinary circumstances. Jester knew just the man: Marshall Huebner, the co-head of insolvency and restructuring at David Polk & Wardell who was already working on AIG for JP Morgan and who happened to be just downstairs.

Months later, Paulson's spokesman told The New York Times that, "Federal Reserve officials, not Mr. Paulson, played the lead role in shaping and financing the A.I.G. bailout."

October 7, 2008: Paulson's appointee unnecessarily pays out $18.7 billion to the CDO counterparties in exchange for nothing.

Actions speak louder than words, and AIG's new CEO acted in a way that removed any doubt that he would make decisions in favor of Goldman. Remember, there was no need to hand over anything to the CDO counterparties, because there was no agreed-upon market value for the CDOs, which were all still highly rated. On October 7, 2008, AIG paid out $18.7 in cash in exchange for nothing. Before that October 7, only 26% of the CDOs' face value had been paid out as cash collateral. Immediately afterward, counterparties hold cash for 56% of the CDOs' face value of $62.1 billion. All of a sudden, the banks, not AIG, had the upper hand.

November 6, 2008: Only at the point when AIG is once again running out of cash and running out of time, and the CDO banks now hold the upper hand, Geithner is brought in to settle a matter when the government is backed into a corner. (Checkmate anyone?)

On November 5, 2008 only $24 billion remained available under the government's revolving credit facility, though that cash could have been used up overnight if AIG were downgraded below A-. But, as S&P said, "if mortgage-related losses continue to worsen, then we could lower the ratings into the 'BBB' category."

The CDOs, (which would all be downgraded into the CCC category in a few months), remained a dagger hanging over AIG's liquidity situation. The only way to restore confidence in the company would be to remove that risk.

But the banks now had the upper hand, since they held most of the cash. Time was not on Geithner's side, and protracted negotiations over the CDOs' underlying value could have taken forever. Also, 29% of the remaining CDO exposure belonged to two French banks, whose regulator advised Geithner that it was illegal for them to settle at less than par. Challenging another country's bank regulator would have opened up a whole can of worms at a point when the risk of global financial panic was very real.

Geithner's attempts to drive a harder bargain would have created a crisis in confidence that could have likely triggered a further ratings downgrade. The $27 billion to remove the CDO albatross off of AIG's books was only 15% of the entire $180 billion bailout package.

November 12, 2008: Following public disclosure of the backdoor bailout, Paulson announces his big bait-and-switch: his refusal to use TARP funds to stabilize the mortgage markets.

The collective amnesia of mainstream media notwithstanding, there was full contemporaneous public disclosure of the backdoor bailout of the banks at the time the deal was cut. The bailout package had a lot of moving parts, so it took The Wall Street Journal a day or so before it figured out precisely hat was going on. "New AIG Rescue Is Bank Blessing," printed on page C1, explained that banks "will be compensated for the securities' full, or par, value in exchange for allowing AIG to unwind the credit-default swaps." And for anyone who was slow on the uptake, the Journal printed a picture:

Once the public learned that the CDOs no longer posed a risk to AIG, Paulson announced his his big bait-and-switch: his refusal to use TARP funds to stabilize the mortgage markets. This about face causes the value of all mortgage securities to plummet, imposing an additional loss on Maiden Lane III (and triggering the insolvency of Merrill Lynch).

But Paulson's coup de grace was to use one of his appointees to fabricate a false history of the backdoor bailout. But that's for another piece.

A month before the September 2008 rescue, Goldman Sachs approached AIG about tearing up contracts protecting the bank against losses on collateralized debt obligations, or holdings backed by mortgages, according to a BlackRock Inc. presentation dated Nov. 5, 2008. Goldman Sachs was the only counterparty willing to cancel the credit-default swaps and bear the risk of further CDO losses, provided that AIG make payments based on the bank's larger-than-average estimate of market declines.

Tear up the contracts in exchange for what? Par? How much less than par? If you don't the number, you don't have a story. Goldman and AIG had been arguing over collateral postings for over a year. A phrase like, "payments based on the bank's larger-than-average estimate of market declines," is a meaningless term. Real journalists would put up or shut up.

Instead, we story is padded with lots of empty filler, all of which are used to make Goldman look good. Stuff like:

"We had always made it clear that we were prepared to tear up contracts, it just had to be at the right price," Lucas van Praag, a spokesman for Goldman Sachs in New York, said in an interview...Goldman Sachs, which created securities tied to home loans and serviced debt on residential properties, "would have had a very decent view of what the underlying mortgage bonds were and what they thought they were worth," said Thomas J. Adams, a partner at law firm at Paykin Krieg & Adams LLP in New York...

The real inflation for the last decade has been around 6% on average, calculate for yourself that you will have lost money in all the 3 classic investment classes - the most in stocks as they need to double from here just to make back your inflation losses. The zero interest rate of the FED only benefits the banks profit as they have far cheaper financing and in cases of Goldman they make an extra 15-20 bil. profit at least as they have no Mainstreet exposure completely windfall profit.

The SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers.

America is not what the mass media try to make you believe already for a long time - Clinton is one of the biggest liars in the US history since he started with Greenspan the phony stats game again in full gear - the blue line is the one which is real as alone last month over 600k were kicked out of the statistics instead of over 700k unemployed only 85k were reported.

Take the time to read these excellent research on the mortgage situation and you will see easily how screwed up the real situation is and t hat the pending losses of banks are closer to the 5 tril mark not mentioning all the derivatives which should double that sum easily.